Tax problem - Research Paper Example

Please prepare a memorandum to me addressing the tax consequences of receiving the $200,000 back-pay and damages award, and any gross up she might receive caused by the bunching effect of receiving the award in a single year. Be sure to cite any authority bearing on these questions. _____________________________________________________________________________ MEMORANDUM TO: S. Partner, C.P.A. FROM: J. Accountant RE: Brenda Broccoli In Brenda’s case, three facts must be considered: structured settlements are a possibility; there is one major tax advantage to having a structured settlement; and there is one major disadvantage to having a structured settlement.

The structured settlement itself was devised 29 years ago in order to ensure that people who suddenly came into money due to a jury’s award would not have to suffer financial consequences that come with new-found wealth. “In 1982, Congress created…the structured settlement. Rather than paying [a] plaintiff with a single check of $1 million, defendant pays plaintiff $2 million in increments over the next twenty years. [S]preading the receipt over a long period of time [relegates]…settlement monies to periodic payments, creating the structured settlement tax subsidy.

”1 One of the major problems that had been plaguing people who won large sums of money from jury trials included the fact that people would be subject to losing or spending all of their money in a very irresponsible fashion. This was partially due to the fact that many people simply were not prepared to deal with such large sums of money, had poor financial planning, and, as a result—would lose all of their settlements in a very short time. The best aspect of making sure that one gets a structured settlement for the payout of $200K is that, most likely, Brenda could maintain her current tax bracket instead of being taxed in the second-highest tax bracket in the country.

“One significant advantage of a structured settlement is tax avoidance. With appropriate set-up, a structured settlement may significantly reduce the plaintiff's tax obligations as a result of the settlement, and may in some cases be tax-free.”2 What would be ideal is if Brenda’s settlement was tax-free. The specifics would have to be worked out with her tax lawyers, but perhaps they could set up a tax shelter in the Cayman Islands by setting up an account there and funneling the money there—either that or in Switzerland.

Unfortunately, since all the money in a structured settlement isn’t received at one time, no big purchases can be made—such as buying a house. “One of the disadvantages to a structured settlement is that you cannot make any changes in the amount you receive or in your schedule of payments. That is why it is imperative when you agree to a structure, that you try…to anticipate what your needs will be over [time].”3 Of course, it would really depend upon the payout amount of the structured settlement as to what types of goods and services could be purchased based upon Brenda’s budget.

It is recommended that Ms. Broccoli make full advantage of her tax lawyers, who specialize in this very same type of legal dilemma.